To tackle instances of erroneous trading activities in the securities market, SEBI on Wednesday proposed a slew of measures for the stock exchanges including well-defined parameters and time-bound approach for deciding on annulment of such trades.
The latest suggestions from SEBI comes against the backdrop of at least four instances of faulty trades disrupting the market in recent times, the latest being placing of erroneous orders on the National Stock Exchange in February this year.
Releasing a discussion paper on policy with regard to erroneous trades, Securities and Exchange Board of India (SEBI) said the objective is to “have a uniform policy for trade annulment.”
According to the market regulator, stock exchanges shall adopt a transparent and time-bound approach to decide upon cases related to annulment of trade before making the final settlement.
Suggesting that bourses need to define minimum parameters to identify erroneous orders/trades, SEBI said that cancellation should happen only in exceptional situations.
The exceptional circumstances include fraud and market manipulation.
“Stock exchanges shall examine cases of erroneous orders/ trades and apply deterrent penalties in form of fines or suspension of trading rights of the stock broker,” the discussion paper said.
At present, SEBI has not prescribed regulatory framework with regard to ‘annulment of trades’ and stock exchanges are empowered to take action as they deem fit.
Public comments on the paper can be submitted to SEBI till October 31.
“In order to provide certainty to trades executed on the stock exchange’s trading platform, the trades should not be annulled under normal circumstances. Trade annulment should only be considered under exceptional circumstances (fraud, market manipulation, regulatory action, error that impacts the sanctity of price discovery, etc),” the paper said.
The stock exchange shall clearly define the circumstances for entertaining requests for cancellation of trade or price reset.
Generally, ‘price reset’ is a mechanism where the price of executed trades are adjusted to a new determined price.
Besides, the market watchdog has proposed that bourses should analyse the potential effect of trade annulment.
With regard to framework adopted by stock exchanges, the paper has said that they should specify the type of entities who can invoke the mechanism for cancellation of erroneous trades.
Among others, SEBI has suggested that stock exchanges shall provide a mechanism for concerned parties to request a review of the decision related to erroneous trades and also publish the same on their websites.
The discussion paper focuses on various issues, related to erroneous trades, including whether such trading activities resulting from lapses in internal risk controls of stock brokers can be considered for trade annulment.
Even though erroneous trades might occur despite all preventive measures, the paper said that prevention of such instances forms an important part of stock exchanges’ risk management framework.
To prevent market manipulation, exchanges have online surveillance mechanisms in place.
Globally, bourses that have adopted a ‘no trade modification or cancellation policy’ expect stock brokers to have appropriate checks to prevent faulty trades at their ends.
In this age of computerised trading, errors have taken the form of fat-finger errors and system faults (malfunction in trading systems / algorithms of the stock brokers or malfunction in stock exchanges’ trading platforms), according to background information provided in the paper.
Considered one of the worst trading disruptions, a flash crash saw American benchmark stock index Dow Jones Industrial Average plunging nearly nine per cent in May 2010.